Cable Franchise Fees

The FCC clarified several issues surrounding the calculation of cable franchise fees in its report and order in 2007, including:

(i) the franchise fee revenue base;

(ii) limitations on charges incidental to the awarding or enforcing of a franchise;

(iii) the proper classification of in-kind payments unrelated to the provision of cable service; and

(iv) the proper classification of contributions in support of PEG services and equipment.

Later in a Second Report and Order, the FCC applied the majority of these findings and rules to existing as well as competitive entrants.

Franchise Fee Revenue Base

In its order, the FCC clarified “that a cable operator is not required to pay franchise fees on revenues from non-cable services.” According to the FCC, this prohibition would specifically apply to cable modem service revenues, broadband data service revenues, Internet access revenues and other non-cable service revenues.

The FCC did not specifically address whether advertising revenues, home shopping channel commissions, launch support, late fees, installation fees and even equipment revenues, because they could be considered “non-cable” services. The FCC does note that advertising revenues and home shopping commissions have historically been included in gross revenues for franchise fee calculation purposes, but it does not say such revenues and commissions can be included in the calculation of gross revenues going forward.

Charges Incidental to the Awarding or Enforcing of a Franchise

Section 622(g)(2)(D) of the Cable Act excludes from the federal five percent franchise fee cap “requirements or charges incidental to the awarding or enforcing of the franchise, including payments for bonds, security funds, letters of credit, insurance, indemnification, penalties, or liquidated damages . . .” According to the FCC, the term “incidental” includes only those items listed in Section 622(g)(2)(D), “as well as other minor expenses” described in the order. Examples of charges that are not “necessarily” to be regarded as incidental include processing fees, acceptance fees, consultant fees, and attorney fees. Reasonable franchise application fees and processing fees are, however, to be regarded as proper incidental fees that do not count towards the federal franchise fee cap.

The FCC also concluded that “free or discounted services provided to an LFA” and certain “in-kind payments” are non-incidental costs that must be considered franchise fees. The order was silent on the specific treatment of institutional networks and whether the costs associated with providing fiber for institutional networks and furnishing free drops, outlets and cable service to governmental institutions could be deducted from a cable operator’s franchise fee payments.

In-Kind Payments Unrelated to the Provision of Cable Service

The Report and Order finds that “any requests made by LFAs that are unrelated to the provision of cable service by a new competitive entrant are subject to the statutory 5 percent franchise fee cap.” The FCC provides no concrete guidance as to what types of financial and in-kind requests would not be counted against the franchise fee cap, but does list certain examples of requirements that apparently would be deemed franchise fees, if included in franchise documents, such as scholarship grants, video hookups, money for wildflower seeds and fiber for traffic signal monitoring.

Contributions in Support of PEG Services and Equipment

Section 622(g)(2)(C) of the Cable Act specifies that “capital costs which are required by the franchise to be incurred by the cable operator for public, educational, or governmental access facilities” are not franchise fees. The FCC interprets this language to encompass “those costs incurred in or associated with the construction of PEG access facilities.” The order goes on to state that “payments in support of the use of PEG access facilities” are franchise fees. These payments in support of PEG include, but are not limited to, “salaries and training.”